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Non-UK companies to be prosecuted for failing to prevent "economic crime" anywhere in the world

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12 SEP 2016By:

Joshua Domb

If a controversial new law is introduced in the UK, all companies with a connection to the UK will potentially be made liable for acts of "economic crime" committed anywhere in the world by their "associated persons".

The UK's Attorney-General, Jeremy Wright QC, said last week at a symposium on economic crime in Cambridge that the Government would consult on plans to introduce legislation which makes companies liable for a failure to prevent economic crime.

"Economic crime" is likely to be broadly defined to include offences such as fraud, theft, false accounting, forgery, destroying company documents, money laundering, handling the proceeds of crime, etc, plus a range of offences under the Financial Services and Markets Act 2000.

If implemented, the new offence is likely to resemble section 7 of the UK Bribery Act 2010 by making companies criminally liable for acts of their "associated persons". Associated persons are likely to be defined as anyone who provides services for or on behalf of the company, anywhere in the world, eg employees, subsidiaries, agents, intermediaries and contractors, joint venture partners, etc.

It is expected that the legislation will have broad extra-territorial effect and will apply to crimes committed by an associated person anywhere in the world. It is also likely that the legislation will apply to any company that is incorporated in the UK or any company that conducts business, or part of a business, in the UK (eg via a subsidiary, sales operations, a representative office or even simply as a result of a listing on the London Stock Exchange). This means that companies based outside the UK can be prosecuted in the UK.

Jeremy Wright QC said that "When considering the question 'where does the buck stop?' and who is responsible for economic crime, it is clear that the answer is to be found at every level, from the boardroom down".

According to an article on the front page of “The Times” on 12 September 2016, a government source has confirmed that the consultation document will soon be released.

Introduction

Earlier this year, former Prime Minister David Cameron announced that the Government would consult on creating a new offence of failing to prevent economic crime (details and analysis). Since then, the Government and the new Prime Minister Theresa May have been focused on more immediate concerns such as 'Brexit' but it appears that momentum is once again gathering behind the proposed new offence with the consultation process to begin shortly.

Key points

At present, a company can only be found liable for fraud and other economic crimes in the UK if it can be proved that persons at executive or board level (for legal purposes, the "directing mind" of the company) were complicit in the criminality. Establishing such involvement is usually difficult, particularly in large corporations where responsibilities are divided between many individuals and the chain of knowledge may break long before it reaches senior management. Regulators have therefore struggled to attribute liability to corporate entities. This was particularly evident in the case of Tom Hayes who was recently convicted for LIBOR manipulation in circumstances where the authorities were unable to bring any charges against UBS, the bank for whom he worked, because they could not show that anyone sufficiently senior was complicit in the criminality.

It is likely that any new offence of failing to prevent economic crime will be modelled on section 7 of the Bribery Act. This provides that a company will be guilty of a criminal offence where an associated person commits bribery, unless the company can prove that it had "adequate procedures" in place to prevent such conduct. An "associated person" will include an employee or agent, or indeed, anyone who provides services for or on behalf of the company anywhere in the world.

Under the Bribery Act, a company will only have a defence to the section 7 offence if it can show that it had in place "adequate procedures" that were "designed to prevent" bribery by associated persons. It is likely that any new offence concerned with failure to prevent economic crime will benefit from a similar defence, though it will not be clear until the consultation document is released whether the defence will be one of “adequate” procedures, or the slightly lesser threshold of “reasonable” procedures which is likely to be adopted for the purposes of the new offence of failure to prevent the facilitation of tax evasion (details and analysis).

Comment

The proposed offence will be of significant interest to all companies with a nexus to the UK. Companies with such a nexus are likely to be made liable for the acts of their associated persons. For large organisations, this is likely to include considerable numbers of subsidiaries, employees and agents in numerous jurisdictions, some of whom may be difficult to oversee. Companies found guilty of an offence will inevitably be at risk of unlimited fines, disgorgement and a range of ancillary legal and regulatory sanctions. The risks, consequences and related compliance burden are therefore potentially very significant.

Extraterritoriality / application to non-UK companies

It is likely that the legislation will apply to any company that is incorporated in the UK or any company that conducts business, or part of a business, in the UK (eg via a subsidiary, sales operations, a representative office or even simply as a result of a listing on the London Stock Exchange). It is also expected that the legislation will have broad extra-territorial effect and will apply to crimes committed by an associated person anywhere in the world.

The likely extraterritorial application of the new offence should not be underestimated. If the language of the consultation follows the model of the Bribery Act then it might be possible to have a situation where, for example, a European company which sells products in the UK can be prosecuted under the new offence for an act of economic crime committed by a subsidiary in Africa. If this is reflected in the language of the consultation, companies will need to consider how they modify their existing compliance programs to ensure they can take advantage of the defence provided for. This will represent a significant additional compliance burden for companies when many are already struggling to manage their obligations under the Bribery Act.

Possible requirements of the new offence

A further point which will need to be clarified through the consultation process is whether, as with section 7, there will be a requirement for the associated person to commit the crime with the intention of "obtaining or retaining business, or an advantage in the conduct of business" for the company. This may create a number of practical issues in relation to the broad range of offences referred to above, particularly money laundering. Indeed, it is to be noted that the proposed new offence of failure to prevent the facilitation of tax evasion by associated persons, whilst largely modelled on section 7, has dropped the requirement for an intention to benefit the company. In circumstances where not all "economic crimes" sit easily within the section 7 model, careful consideration will have to be given to the drafting of the proposed new offence.

Planning and preparation

Companies should pay careful attention to the wording of the consultation when it is released and consider whether they would like to participate in the consultation process. At a time when companies are increasingly struggling to balance commercial and compliance considerations, this new offence will likely be an unwelcome additional demand on already stretched time and resources.

Early engagement and planning will be key to ensuring that, when the new offence does reach the statute books (as it almost certainly will) business disruption is kept to a minimum. Companies should also view this as an opportunity to ensure that all business conducted on their behalf, anywhere in the world, is being undertaken to high moral and ethical standards and to promote, within their organisations, a strong culture of compliance. Companies that can show such commitment (especially in the current climate of distrust around big business) will inevitably benefit from an improved reputation in the minds of their customers and the public. This may, in turn, open the door to previously untapped opportunities for business and revenue.

The comments of the UK's Attorney General suggest that the new law is likely to be implemented in the not-too-distant future. Companies should take advice now about how they can prepare for this significant change. Experience shows that leaving matters to the last minute adds significantly to the overall costs and disruption. It also often results in a compliance program that has not been properly tailored and is therefore too complex to properly implement and operate cost effectively.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.